I answer your four questions about the consequences of defaulting on a credit card debt below.
1. Charge-Off
As with most consumer debts, failing to make payments on your credit card accounts in a timely manner will likely result in the lenders reporting late payments to the major U.S. consumer credit reporting agencies — Experian, Equifax, and TransUnion. After receiving no payment for 6-8 months, the creditors will be required to “charge off” the debts, meaning that they must remove the debt from their “accounts receivable” books; a charge-off does not mean that you are not liable for the debt, only that the creditor. Charge-offs will appear as derogatory items on your credit reports, and will likely cause a significant reduction in your credit score. To read more about credit, credit scoring, and credit reports, I encourage you to visit the Bills.com at Credit Information & Resources page.
Collections
While the credit problems associated with financial hardship are an issue for consumers who are planning to make a large purchase in the near future, the more immediate consequence experienced by most consumers are the collection activities undertaken by many creditors. You will likely receive collection calls and letters from the creditor directly. If you are still unable to pay the debt after several months, the creditor is likely to refer the account to a third-party collection agency.
Third-party collectors are known to be much more aggressive in their collection tactics than original creditors, so do not be surprised if the calls become more persistent, or even threatening. Thankfully, federal law, the Fair Debt Collections Practices Act, requires third-party debt collectors to stop calling you if you send a written demand to cease communication. You can find an example cease communication demand letter at the Bills.com Debt Do-it-yourself page.
Judgments
In some cases, when all other collection efforts fail, a creditor will decide to file a lawsuit against a consumer for his or her unpaid credit card account. In my experience, only a small percentage of delinquent accounts end up in litigation, but it is a possibility about which you should be aware. If one of your creditors sues you, the court will likely issue a judgment in the creditor’s favor. Depending on your state’s laws regarding the enforcement of judgments, the creditor may be able to garnish your wages, levy your bank accounts, or take other action to enforce its judgment.
Most delinquent consumer debts do not result in litigation, so you should not be overly concerned, but if a creditor does file a lawsuit against you, you may need to consider establishing a repayment plan, or even filing for bankruptcy protection, to prevent further enforcement action.
2. Rebuilding Credit
If you decide to file for bankruptcy protection, the case will appear on your credit reports for ten years from the date of filing, and will likely cause significant damage to your credit rating, especially for the first few years after filing. As time passes, credit scoring models and most lenders give less weight to older derogatory items in favor of newer positive trade lines when reviewing a consumer’s credit history. You need new credit lines so you can establish positive payment history to counterbalance the negative impact of your bankruptcy filing. Establishing a positive payment history can be difficult for people who have had past credit problems, especially those forced to file for bankruptcy protection.
Consider two options. First, if you know someone with an established credit history who will co-sign a loan with you, you may be able to obtain a loan and start building your credit.
Second, if you cannot find someone to co-sign an unsecured loan, apply for a secured credit card. Secured credit cards require you to deposit cash in an account with the credit card issuer. The credit line available on the card is equal to the amount of cash on deposit. This may sound strange; why not just spend your own cash? Secured credit cards report timely payments to the credit bureaus, which helps establish a positive credit history. To read more about bankruptcy, and the alternatives available to consumers, visit the Bills.com debt help page.
3. Credit Score Impact
From a credit score perspective, it is better to default on one large account than defaulting on many small accounts. Although the large account would carry a heavy weight, the many small delinquencies cause more damage than one big delinquency. But that's not the total picture. As for debt settlement programs, generally the opposite is true — the more accounts you have, the more flexibility the debt servicing company has in negotiating with your creditors. If you have only one account, if the creditor is unwilling to negotiate, the whole strategy is a bust. However, if you have multiple creditors, one or two creditors’ refusal to cooperate will not defeat the plan as a whole.
4. Bankruptcy
Both types of bankruptcy (Chapter 7 and Chapter 13), as well as foreclosure actions, are viewed as serious derogatory items on consumer credit histories. I cannot say that one is “worse” than the other, as each has its own serious consequences. However, I can tell you that a foreclosure action is often more costly for consumers; in addition, many consumers find that they must file for bankruptcy after foreclosure to prevent further collection action by their mortgage lender.
If you face foreclosure and/or considering filing for bankruptcy protection, I strongly encourage you to consult with an attorney in your area to discuss your financial difficulties. Your attorney will review the details of your situation and help you decide what actions are appropriate for you and your family.
I wish you the best of luck in resolving the financial problems you are facing.
I hope this information helps you Find. Learn & Save.
Best,
Bill
Columbia, SC | February 11, 2013
February 12, 2013
- Newly delinquent: You are one or two months behind in payments. If this describes you, talk to your credit card issuer about its hardship program. Credit card issuers do not discuss these plans, and are no obligation to offer these plans. Ask a customer service representative if one is available, and if so, whether you qualify based on your payment history and circumstances.
- Delinquent less than ~180 days: If this describes you, ask the credit card issuer if you still qualify for a hardship program.
- Delinquent more than about 180 days but less than your state's statute of limitations for breach of contact: Start negotiating a settlement to your debt. Follow the link I just mentioned to learn how.
- Your delinquency exceeds your state's statute of limitations for breach of contract: The clock on your state's statute of limitations starts running when you miss your first payment. If the clock for this debt has run out in your state, the original creditor or its collection agent can still file a lawsuit against you to collect the debt (in most states). If it does so, you must file a motion with the court to assert a statute of limitations defense. Because you have this defense available, you might as well send the collector a cease communications notice to stop it from contacting you.
You mentioned a $1,250 debt. Most debt settlement and credit card counseling providers will not accept you for such a small (relatively speaking) debt amount. Therefore, arm yourself with information by following the links I mentioned above, and take the action appropriate to where you are in the collection cycle.
Mukwonago, WI | November 11, 2012
November 12, 2012
Separately, you could try to take action against your friend, for not honoring the agreement the two of you had.
The Woodlands, TX | August 27, 2012
August 27, 2012
Chicago, IL | July 22, 2012
July 24, 2012
Pineville, NC | April 17, 2012
April 17, 2012
- Collections Advice explains the collections process and options for resolving your debt.
- North Carolina Collection Laws explains your rights and liabilities as a North Carolina resident.
One last thought: Try the Bills.com Debt Coach, which is a no-cost, no-obligation, no-nonsense analysis of your debts. After you enter your debts into the tool, Debt Coach calculates the costs and benefits of each debt resolution strategy available to you.
Issaquah, WA | April 16, 2012
April 16, 2012
See the Bills.com resource Collections Advice to learn more about your rights and liabilities.
B/o Medford Lakes, NJ | March 21, 2012
March 21, 2012
Judgments appear on a credit report for 7½ years from the date the judgment was entered, or the length of the judgment, whichever is longer. The date the judgment was paid is irrelevant for the purposes of determining how long the judgment appears on a credit report. In other words, your paying the judgment will not reset the clock.
Burbank, CA | March 20, 2012
March 20, 2012
Zionville, NC | March 21, 2012
Tumwater, WA | February 24, 2012
February 26, 2012
Sunnyvale, CA | January 01, 2012
January 02, 2012
Debt settlement could be a viable alternative, but only if you can afford the monthly payment that the program requires. Bankruptcy may be the best alternative, especially if, in addition to the 80K in unsecured debt, you are left with a deficiency balance on the mortgage, post-short sale.
I recommend that you read the Bills.com article about debt relief and get a no-cost, no obligation analysis of your debt options from a pre-screened debt relief provider. Speak with a bankruptcy attorney, as well.
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